Bond yields rise on RBI chief&#8217;s comments

Mumbai: Indian federal bond yields spiked on Tuesday after the RBI governor said inflation was becoming a concern sooner than expected, raising worries it would move to a hawkish monetary stance in the coming months.

“We believe that inflation is becoming a concern sooner than we’d expected earlier and we have to balance the need for growth and price stability," Reserve Bank of India governor Duvvuri Subbarao told Reuters in an interview in the Swiss city of Basel.

“Our current monetary and fiscal stance is not the steady state. We have to unwind," he said.

The 10-year benchmark bond yield ended at 7.37%, off an intraday high of 7.39%, and eight basis points above Monday’s close of 7.29%. On Friday it rose to 7.50% during trade, which was its highest since 18 November.

“Subbarao’s comments were the overriding factor in the market. With inflation inching towards positive territory, it’s only a matter of time the RBI acts," said a trader with a private bank, referring to the Reserve Bank of India.

Volume was a normal Rs65.6 billion ($1.4 billion) on the central bank’s trading platform with the 10-year benchmark bond being the most actively traded.

Traders said comments by finance minister Pranab Mukherjee that the government was not planning to reduce spending announced since December to pump-prime the economy provided some relief to the market, limiting the spike in yields.

“It helped keep the 10-year bond yield within 7.40%," said the trader at the private bank.

After market hours, the central bank said it would buy back up to Rs60 billion of federal bonds on Thursday.

The central bank sold Rs91.6 billion of state loans on Tuesday. It will auction Rs90 billion of treasury bills on Wednesday and Rs110 billion of government bonds on Friday.